The Quick Answer to the Problem of Crude Oil Futures Speculation

If you know about how most crude is put on contract, and how that crude gets to our shores (discounting domestic, Canadian, and other non-OPEC sources) you would see the following:

  1. The same bulk oil carriers (supertankers) going back and forth from the Straights of Hormuz to the various storage facilities on the east and west coast of the USA. Same bulk transporters, same tankers, same terminals, same refiners.
  2. The domestic storage and refining capacity has not changed substantially for decades. Our usage has increased, which has put pressure in the tempo of the rate of transport and distillation. Overall, USA consumption has increased 20% since the 90’s, and we have the same refiners and storage.
  3. What has changed is the amount of money available to place on futures contracts. There is more money on paper to promise a certain price of delivery on a future date. So much money in fact, that these contracts exceed the available oil stock by 2 or 3 times the physical inventory controlled.

This has caused a tremendous surge in oil above the actual dynamics of supply and demand. If you and I stand around a grain silo and keep bidding up the price amid a climate of scarcity, and we have no hope of ever taking delivery of the wheat…..and we are joined by 1000’s of other speculators that are doing the same thing?

That’s a good picture of the trading pit at the NYMEX.  How can we fix this?

Well, I suggest that we we hire a SWAT team to tear gas or pepper spray the Pit for a few days to clear out the most egregious offenders. Barring that, possibly Marlon Perkins could be brought out of cryogenic suspension in order to shoot a round of tranquilizer darts at the floor traders in the NYMEX and Chcago MERC pits. That ought to bring the price of crude down and fast.

Then we can limit trading to those that can take delivery of the product – period. Futures contracts on paper for dry barrels could be allocated to professional options boards adhering to stringent margins requirements.

The worst take on all this, of course, is the liars that frequent CNBC, mostly investment analysts that are paid to say that no amount of dry contract speculation can affect the price of oil. They are liars, they are stealing from you, and they must be dealt with, in the parking lot of the NYMEX, if need be…..maybe a slap, maybe a baseball bat, maybe a decent shaming.

Something has to be done bring conscience back to the futures business.

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